The Retirement Trial Run Couples Should Do Before Quitting Work
Retirement comes with a lot of changes — more time to travel, a less rigid schedule and the potential for downsizing among them — but it’s especially important to prepare adjustments to your finances. Income sources, taxes and spending all need to be reassessed once you retire to ensure you’re living the lifestyle you want while making your money last.
Putting your financial plan to the test can help. Here’s how.
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Why couples should 'practice' retirement
Retirement will bring significant changes to your finances and lifestyle, especially if one partner retires sooner than the other. A trial run will test if you can live on one person’s salary, and is a good way to prepare for retirement.
During this test, you will cover monthly bills, taxes, healthcare, travel and other expenses with the fixed income you expect to receive in retirement. A one-to-three month practice round can help you feel better prepared for retirement.
How to do a realistic retirement trial run
The first step is to identify all of the income you expect to receive in retirement, such as Social Security, pensions, planned portfolio withdrawals and part-time work, if applicable. You can also consider how much of your cash reserves you plan to spend. Limit yourself to living on that amount instead of your full salary and see if it works. You can route current paychecks into savings or investments during this test to simulate what your retirement lifestyle would be like.
While it may be simple to predict housing costs, groceries and other expenses you have navigated for multiple decades, there are some expenses that get underestimated. Medicare premiums can get higher over time, with supplemental coverage increasing as you age. Home repairs can also take a toll on your finances, and you may have to offer financial support for adult children, aging parents or both, depending on when you retire.
Couples should also establish who is responsible for paying the bills, managing investments and making other decisions, as the roles could change in retirement. Responsibilities can be split or allocated to one person.
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What the trial run can reveal and how to adjust
The trial run will provide clarity on whether you are ready for retirement and any issues you have to address before leaving work. A couple may discover retirement isn’t right for them at this time or that they can manage living expenses on one spouse’s income. They might also have to lower spending expectations.
This test can also help retirees assess the best time to take out Social Security. People who couldn’t keep up with their living expenses during the trial run may want to delay Social Security, especially if they planned to receive their benefits at 62. The later you claim Social Security, the larger your monthly checks will be.
You don’t have to "pass" the retirement trial run. This test is designed to pinpoint any weak spots so you can address them while there is still time. One thing you won’t get from this trial is seeing how required minimum distributions (RMDs) will impact your taxes. People with large balances in their pre-tax accounts could be subject to high RMDs later in life. You can gradually withdraw from this account over time to spread the tax hit over a wider window.